Employment outlook continues to improve but real wages likely to fall

New research shows that, while employment growth looks set to continue in the UK, there are signs that this growth is beginning to slow and that real wages are likely to fall during 2017 for many employees. Concerns are also emerging over the implications of Brexit for employers’ access to migrant labour and a reduction in employer investment intentions.

This is according to the latest quarterly CIPD/Adecco Group Labour Market Outlook, which shows that the net employment balance, while remaining in positive territory at +22, based on the difference between the share of employers expanding their workforce and the share of employers reducing their workforce, has shown a slight negative decline from the previous quarter’s figure of +27.

At the same time, real wages look set to fall during 2017 as, for the second quarter running, employers anticipate median basic pay settlements of just 1.1% for the 12 months ahead, against a backdrop of anticipated higher inflation. Furthermore, although 42% of employers believe that future restrictions on EU labour will could damage their UK operations, just 15% have started to prepare for this eventuality.

In this context, it is not surprising that just 6% of employers said they favour a ‘hard Brexit’ which would see the introduction of World Trade Organisation rules. The majority of employers broadly favour existing trading arrangements (16%), a European Economic Area type arrangement including free movement of labour (26%), or negotiated bilateral free trade arrangements (10%).

Commenting on the findings, Gerwyn Davies, Labour Market Analyst at the CIPD, the professional body for HR and people development, said:

“The report points to the UK economy beginning to face some likely headwinds following the UK’s decision to leave the European Union. The impact of potential restrictions to migrant labour will certainly be exacerbated by the fall we’re seeing in business investment intentions. Given the current level of uncertainty and the projected increases in costs as a result of a weaker pound, it’s not surprising that employers aren’t currently persuaded to respond to likely controls on migration by investing more in skills. However, this will put further pressure on the UK’s productivity growth potential, which is critical to employers’ ability to afford more generous pay increases. Pay expectations are already weak, and as inflation moves up we can expect a period of low or negative real wage growth for the squeezed middle.

“It seems that few UK employers want or are ready for a hard Brexit outcome, which all the latest political commentary seems to be pointing towards. However, uncertainty over the UK’s future arrangements with the EU is no excuse for inaction. From all of the information we have, it’s inevitable that there will be restrictions on EU migrant labour after the UK leaves the EU and employers must be prepared for this. It’s vital that the UK government considers making intermediate arrangements when introducing changes to immigration policy. This will ensure that employers that have come to depend on EU migrants to deal with recruitment difficulties or skills shortages have time to review their recruitment and training and development strategies ahead of Brexit.”

The survey also shows that employers are already reporting that it will be harder to recruit and retain EU migrant workers even before the UK officially leaves the UK. Of the two thirds (62%) of employers that employ migrant workers, almost a quarter (23%) of employers say they have evidence that EU migrants are already considering leaving the UK in the next 12 months as a result of Brexit. Furthermore, more than half (54%) of those who have intentions to recruit EU migrants over the next 12 months believe it will be harder to recruit EU migrants in the year ahead.

Among the 15% of employers that have started planning for the likelihood that it will become harder to recruit EU nationals in the future, 43% say they have started strategic workforce planning, 39% report they are undertaking a review of the organisation’s resourcing strategy, while 22% say they are planning to start investing in or increasing their investment in apprenticeships, and a similar proportion report they are looking to build closer links with schools and colleges.

Commenting on the research, John L Marshall III, CEO of Adecco Group UK & Ireland,the leading provider of workforce solutions, said:

“For years, the UK has been one of the most attractive countries for EU workers, benefitting from easy access to a large, European talent pool. However, the Brexit vote is now seeing UK employers look increasingly concerned about their access to the single market.

“The Brexit decision should therefore serve as a wakeup call for employers, who need to adopt a more strategic approach to workforce planning, investing more in their own staff and engaging with educational institutions to improve the UK’s domestic pipeline of talent.”

The Labour Market Outlook also finds that almost a third of employers (30%) expect that the UK’s vote to leave the EU will increase their costs over the next three months, which may partly explain why employers are more likely to be planning to reduce (15%) rather increase (9%) investment in skills and the continued squeeze on wages.

Gerwyn Davies, CIPD, commented:

“Against this backdrop of uncertainty, now is the right time for organisations to review their strategic priorities and align investment in skills and physical capital to help them overcome a range of related challenges. The recent cut in interest rates should offer employers a timely reminder that borrowing costs for business investment are historically very low, which can help offset the increased risk of skills shortages and lower productivity growth.”

When asked to choose whether free access to the single market or continued easy access to EU migrants is most important to their organisation, 25% said both were equally important, 19% of respondents said free access to the single market, and 19% opted for continued easy access to EU migrants. Less than a third of employers (31%) say neither free access to the single market or the ability to recruit EU migrants is important to the success of their organisation.

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